Management Audit – Full Overview

INTRODUCTION

Compared to statutory audit, management audit is a more modern practise. Operational audit is another name for management audit. The necessity for a review of the management process developed as the duties of the statutory auditor grew.

The statutory auditor’s initial duties were stating whether the balance sheet and profit and loss account were produced in accordance with the Companies Act and providing a true and objective analysis of the company’s financial situation.

This boundary is never crossed by the statutory auditor. The explanation is that a new audit, called management audit, was developed as a consequence of the corporate organization’s expanding size and complexity.

Additionally, the statutory auditor is not expected to confirm whether the management’s policies are correctly implemented or not; to assess how well different management functions and processes are being carried out in order to increase their efficiency; to determine whether a change in the company’s purchasing strategy is advantageous; and he is not expected to suggest that a change in the way the business is run would be advantageous.

A company’s or a business’s ability to succeed or fail is entirely dependent on its management. A management audit is a comprehensive, scientific evaluation of the management’s effectiveness.

The management auditor must take into account the different cost aspects and production-related issues in the current corporate environment.

The reason is that in order to compete in the cutthroat business world, each corporation seeks to reduce production costs by reducing waste and using all available workforce.

The business seeks management consulting services to identify performance issues with management tasks in the modern digital environment.

Business concerns lack access to competent employees in the management cadre or some specialised fields like operation research, electronic data processing, production control, and similar fields.

A specialist in these fields won’t want to work for a company that conducts business. His career goal is to work as a management consultant. He also wants to act as a management auditor and charge exorbitant fees.

Because the customer may make profits greater than what he really spends on advice, the client is willing to pay him hefty rates.

A recent development in auditing is the notion of management audit. Management Audit currently refers to the development of internal audit. However, there are some distinctions between internal audit and management audit.

Meaning

The term “management audit” refers to an investigation, a review of numerous policies, and management action based on a set of predetermined goals.

The management audit is carried out to assess the effectiveness and operations of the management. It is a self-directed evaluation process.

Definition

To comprehend the notion, it would be helpful to learn a few definitions of management audit. The following definitions include some of them:

“Management audit is a comprehensive and constructive examination of an organisational structure of a company, institution, or branch of government, or of any component thereof, such as a division or department, and its plans and objectives, its means of operation, and its use of human and physical facilities,” says William P. Leonard.

“A Management audit is a future-focused, independent and systematic evaluation of the activities of all levels of management for the purpose of increasing organisational profitability and increasing the attainment of other organisational objectives through improvements in the performance of the management function, achievement of programme purpose, social objectives, and employee’s development,” according to The Institute of Internal Auditors Inc.

According to Washbrook, “The whole examination, or part of it, include checks on the effectiveness of managers, their compliance with company or professional standards, the reliability of the management data, the quality of performance of duties, and recommendations for improvement.

According to Leslie R. Howard, “Management audit is an investigation of the business from the top down to determine whether sound management prevails, facilitating the most effective relationship with the outside world as well as the most efficient organisation and smooth operation of the internal organisation.”

“Management auditing is a diagnostic appraisal process for analysing goals, plans, policies, and activities in every phase of operation to turn over unsuspected weaknessess and to develop ideas for improvement in areas that have escaped management attention,” according to the American Institute of Management.

According to Taylor and Perry, “Management auditing is a method to evaluate the effectiveness of management at all levels throughout the organisation; more specifically, it comprises the investigation of a business by a non-governmental entity from the highest executive level downward, in order to ascertain whether sound management prevails throughout, and to report as to its efficiency or otherwise, with recommendations to ensure its effectiveness where such is not the case.”

A management audit, according to William F. Kelly, “is a critical review of an organisational structure and administration with the goal of making recommendations for adjustment and improvement. An audit may involve the entire company structure or be limited to one of its parts, such as a division or department.”

According to Michael Stephen R., “The management audit is the business equivalent of the human physical examination. In many ways, it is similar to a financial audit in that it tests a company’s financial operations against generally accepted standards and practises. In the same way, management audit is an examination of a company’s administrative operations and organisational arrangements using generally accepted standards of good management for evaluation.”

“A systematic independent appraisal activity within an organisation for a review of the entire departmental operations as a service to management,” is how the Federal Financial Officers’ Institute of Canada defines operational auditing.

“The overall objective of operational auditing is to assist all levels of management in the effective discharge of their responsibilities by furnishing them with objective analyses, appraisals, recommendations, and pertinent comments concerning the activities reviewed.”

By using personnel who are not subject-matter experts, Roy A. Lindberg and Theodore Cohn define “a technique for regularly and systematically evaluating units or function effectiveness against corporate and industry standards with the objectives of assuring a given management that its goals are being carried out and/or identifying conditions that can be improved.”

An in-depth examination of the aforementioned expert definitions allows one to determine that management audit includes the following areas:

1. Examining the whole or a portion of the organisational structure
2. evaluating the management’s efficiency and operations.
3. a critical evaluation of management leaders’ actions.
4. Experts must conduct the impartial examination.
5. evaluation of the management board’s performance.
6. examining the management’s objectives, plans, policies, and operations.
7. a determination of the management’s profit potential.
8. Identifying areas of managerial weakness and offering appropriate solutions.
9. preparing management to deal with any issue successfully in the future.

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Objectives of Management Audit

The following list includes the fundamental goals of management audits:

1. To determine the extent to which the organization’s primary goals have been achieved.
2. To identify management leaders’ flaws or inconsistencies.
3. To make sure the management will accomplish the goals.
4. To assist the management in effective operation management.
5. To assist management leaders in carrying out their duties effectively.
6. To recommend to management the available strategies and tools for achieving the goals.
7. To increase the organization’s profitability.
8. To get or make use of the management’s utmost efficiency.
9. To assist the management leaders in carrying out their responsibilities effectively.

Scope of Management Audit

The goals of the management audit and the management’s needs will determine the audit’s scope. The evaluation of the operations for the whole organisation or just a portion of it is covered by management audit. The following is a succinct concise explanation of the management audit’s scope:

1. Review of the management’s objectives, goals, plans, and policies.
2. review of department-specific activities’ performance.
3. Review and evaluation of the planning process.
4. Review and evaluation of the use of the financial and human resources
5. Analyze the organisational structure.
6. Evaluation of management choices and their effects are reviewed.
7. Management leaders evaluate the authority-delegation and responsibility-assignment procedure.
8. Review and evaluation of physical actions and processes.
9. Review of the organization’s systems and processes, including its rules, regulations, and practises.
10. Evaluation of the management information system’s performance.
11. Examining office activities and evaluating their efficacy.
12. review of the management’s approved personnel policy.
13. Review of the management’s internal control procedures and systems.
14. Reviewing the selling and distribution process and evaluating its efficiency.
15. Review and evaluation of buying operations’ efficiency
16. Reviewing the manufacturing process and evaluating its efficacy.

Importance or Need for Management Audit

Management audit is crucial and necessary right now for a number of reasons. Following are the primary reasons why management audit is now necessary:

1. The purpose of management audit is to determine whether or not the company’s established policies are being followed correctly.
2. It aids in the performance enhancement of all managers, including the general manager.
3. A management audit provides recommendations for reducing production costs or eliminating waste.
4. Independent performance analysis is helpful for the general manager or managing director.
5. The methods available to maximise profit and ensure optimal use of all resources are highlighted by management audit.
6. It identifies the areas of weakness or deficiency that lead to ineffective performance and improves performance.
7. A management audit may determine if a firm is financially stable.
8. Sorting out financial and non-financial incentive programmes and connecting them to performance aids management.
9. Banks and other financial institutions may demand a management audit to determine whether or not the loan monies have been used correctly.
10. The management audit helps the international collaborators evaluate the effectiveness and development of the management of the company with whom they have entered into partnership.
11. Public businesses in India adhere to regulations and practises but show little interest in their accomplishments or outcomes. The management audit advises the public firms to alter their perspective and insist on increasing their productivity.
12. The management audit is required to determine the most effective techniques.

Qualification of Management Audit

There is no set educational requirement for management auditors. The cause management audit is the newest internal auditing technique and regulations do not mandate it. Supposedly, the internal auditor may do the management audit as well. As a result, the internal auditor might be given the management audit task for the following reasons:

1. Internal auditors are well-versed in organisational structure, business principles, actual management issues, and related topics. He may thus be able to provide insightful recommendations.
2. The internal auditor discovers a chance to learn more about the management team’s performance across the board.
3. The internal 4 is fully aware of the relationships between the staff. The internal auditor is fully aware of the workers’ strengths and shortcomings personally.
4. The internal auditor looks at how each department in an organisation operates.
5. The internal auditor will have little trouble understanding the reasons why management audit is necessary.

Some claim that the following factors warrant assigning the management audit task to someone other than the internal auditor:

1. The company’s affairs may be seen differently or from a different perspective by an external auditor.
2. He does not get anything from the business. So he boldly makes recommendations to get rid of the performance bottlenecks.
3. He would be well-versed in many different professions. He is very knowledgeable about the best techniques for increasing staff productivity.
4. He is technically savvy.

These two points of view may be supported for good reasons. Finding someone who will do management auditing effectively and cheaply is really tough. In any event, statutory audit is not applicable to the management audit.

There is currently no regulatory authority that establishes any requirements for a management auditor. A management audit will be conducted by management professionals.

They’ve been given the title of management consultants. When choosing a management auditor, management should take into account the technical expertise of the management consultants.

As a management auditor, it is desirable to choose someone different than the internal auditor and statutory auditor.

If the management adopts this method, it will undoubtedly get insightful recommendations for enhancing the effectiveness of the management leaders.

Approach of Management Audit

Before beginning a management audit, a management auditor should set up an audit plan. The management auditor may effectively carry out his tasks with the aid of an effective audit programme if he adheres to the techniques listed below:

1. He needs to assess the formal organisational structure and flowcharts.
2. He needs to evaluate the current management information system.
3. He has to research the different management policies.
4. He has to take a look at the management executives’ scope of power and their allocated duties.
5. He has to review the policies and guidelines for leaves.
6. He should see how different management leaders interact with one another.
7. He should research the organization’s current structure.
8. He need to consider the many
9. He has to evaluate the effects of the management leaders’ choices.
10. He has to familiarise himself with the legal guidelines used in the management of the business.
11. He need to examine the management executives’ working circumstances and atmosphere.
12. He need to research the primary goals and auxiliary
13. He has to go through the different organisational levels.

The management auditor’s expertise and competence are wholly responsible for the management audit’s success.

Preliminaries of Management Audit

It is impossible for one individual to hold all the necessary abilities for audit. To get the best outcomes, a team of professionals should perform the management audit.

As a result, the management audit team should be made up of individuals with expertise in a variety of disciplines, including accounting, engineering, science, psychology, and the like.

These individuals need to get appropriate training. Top management should provide them all possible assistance and the resources they need to develop the abilities needed to evaluate the many management areas.

Before beginning the auditing task, the management auditor needs carry out a number of responsibilities, such as preparation work. Here’s a quick explanation of each:

1. He has to be aware of the workplace culture.
2. He ought to research how management leaders are chosen.
3. He need to research the mentalities of top management.
4. He needs to recognise the natural abilities of management leaders.
5. He has to learn how much management executives are involved in the task being done.
6. He has to adjust the requirements for different kinds of activity.
7. He should pay attention to how management treats CEOs and employees.
8. He has to learn how much discretion is granted to management leaders while carrying out their duties.
9. He has to learn about the management’s control methods.
10. He needs to determine the degree of work satisfaction that management leaders may have.
11. He needs to determine if the personnel is adequate.

The management should provide the auditor the necessary power to certify his evaluation actions. In other words, he ought to have asked the management for a clearly defined authority.

Duties of Management Audit

Fixing the responsibilities of a management auditor is really challenging. He will, however, deal with his job areas. The management auditor might then examine the following things:

1. The management’s purchasing procedures.
2. Sales procedures, such as accepting and carrying out orders.
3. Examining the production process critically.
4. Factory inspection, or the cleanliness of the manufacturing area.
5. Storage spaces.
6. safety measures for a company’s numerous assets, including its final products, raw materials, and raw materials.
7. internal transportation system for people and goods.
8. keeping of records.
9. customer support
10. after-sale support.
11. the handling of client concerns
12. Publicity.
13. Quality control procedures for both final items and raw resources.
14. Production and sales departments now use a communication system.
15. actions taken to reduce manufacturing costs.
16. The company’s chosen distribution method.
17. made a cash payment to creditors.
18. Cash was recovered from creditors.
19. Acceptance of bad debts and the process for writing them off. 20. Workers’ access to safety measures at the industrial site.

Management Auditor Report

The management auditor must accurately examine how the organisation operates.

He should draught a report including the management audit’s findings and recommendations for this purpose. He must clearly and unambiguously give his report.

are mentioned in the report need to be accurate. The statement’s accuracy is determined by the data the management auditor acquired while conducting the audit.

He need to criticise the management without holding back. The management auditor uses polite language and avoids needless pungency while presenting his report.

He should voice his opinions on the current dynamic between the workforce and the management. Generally speaking, the report must address the following topics:

1. Share your thoughts on investment returns.
2. contrasting the actual performance with the benchmarks he or the management have established.
3. Comment about the company’s operational expenses.
4. Share your thoughts on the use of equipment and machinery.
5. suggestions for development.

Conclusion and findings.

Advantages of Management Audit

The following is a discussion of the key benefits of management audits:

1. Identification of management’s current, prospective, and weak points is helpful. With this knowledge, significant advancements or flaw corrections can be made.
2. It helps an organisation build and evaluate its planning system. It then assigns accountability for planning.
3. It aids in enhancing the command and control system. One may adhere to efficient management information systems. A good control system guarantees that standards are not violated.
4. It examines the decision-making process and decision quality. It aids management in making decisions with more impartiality.
5. By continually evaluating every part of the organisation and raising the bar, it safeguards the interests of the organisation.
6. It aids management in maintaining open lines of communication among the responsibility centres.
7. In light of changes in the corporate environment, it helps management find chances for innovations.
8. It aids management in enhancing coordination and assessing control methods.
9. It helps the management identify the problems that hinder profitability and suggests solutions to get rid of them so that profitability may increase.
10. It advises management to increase overall effectiveness and efficiency.
11. In any organisation, human resources are essential. Management audit supports the development of human resources and the improvement of the performance evaluation system.
12. It makes managing pressure easier. As a result, the management may give essential and unique issues greater attention.

Disadvantages of Management Audit

1. The parameters of a management audit are vague.
2. An annual management audit is not always carried out. Therefore, nothing can be improved during the interim time.
3. There are no industry-specific standards for management audit.
4. Finding a capable and experienced management auditor to undertake a management audit is quite challenging.
5. Authority relationships may become more complicated as a result of management audit.
6. The management auditor has to have cross-disciplinary expertise. In reality, finding an auditor with such competence is really challenging.
7. Management dislikes having its decisions and actions evaluated.
8. An extra expenditure for the business unit is the management audit expense. As a result, practically all business units think it’s unnecessary to cover these extra costs.
9. In reality, the management audit hinders CEOs’ initiative instead of supporting it.
10. A huge firm is unable to carry out an extensive management audit. As a consequence, the findings are unreliable.
11. Management leaders are not prepared to take the management auditor’s criticism. Therefore, the management executives oppose conducting the management audit.
12. The competency of management executives cannot be evaluated by a management auditor.
13. To support his hiring, a management auditor could attempt to bring out other people’s mistakes.
14. The management auditor’s recommendations can provide a chance for controversy. The management leaders do not have a same viewpoint. According to Bradford Cadmus, “the auditor is not in a position to make specific recommendations as to change his primary responsibility, which is fulfilled when he has brought the results of the policy to attention through his report, which should present the facts in such a way that the situation may not be overlooked or dismissed without adequate review at a suitable management level.”
15. If the management auditor makes suggestions carelessly or casually, the expected outcomes could not be achieved.
16. The goal of the management audit is thwarted when management modifies the recommendations before implementing them rather than implementing them as intended.
17. The manager will constantly focus on maintaining accurate books of accounts rather than increasing productivity and efficiency.

The company can gain more benefits if the management adopts a system to link incentives to the efficiency of the management executives who will also favour the management audit assessing their performance.

Under these circumstances, the management audit is an effective and efficient tool for the management to exercise control if the management audit is properly conducted.

Differences between Management Audit and Statutory Audit

The statutory audit and the management audit have many similarities, but there are also some key distinctions, which are covered below:

1. The statutory auditor looks at the books of accounts to learn about previous performance, whereas the management auditor analyses and assesses management policies and performance to assure its future success.
2. The goal of a management audit is to guarantee that management performance is improved, while a statutory audit looks at whether or not the books of accounts are kept up to date.
3. The statutory auditor reports the financial situation of a corporation as of a certain date, whereas the management auditor reports the performance of executives over a specific time period.
4. Statutory audit is a post-mortem investigation, while management audit implements preventative measures.
5. Statutory audit does not provide an opinion on the company’s state of affairs, however management audit offers strategies for achieving the predetermined goals in the days to come.
6. The data for the management auditor comes from both internal and external sources, but the data for the statutory auditor exclusively comes from internal sources.
7. The conclusion of the statutory audit triggers the start of the management audit.
8. Management audits are optional; statutory audits, which are mandated by law, are mandatory.
9. Legal laws and regulations must be followed when performing statutory audit, but there are no clear-cut rules and regulations controlling the performance of management audit.
10. In contrast to statutory audit, which solely takes into account financial factors, management audit also takes into account non-financial factors including organisational structure, manufacturing procedures, buying policies, and the like.
11. While the Companies Act specifies the requirements for statutory auditors, there is no such need for management auditors.
12. In the event of a management audit, management standards or norms are adhered to, whereas in the case of a statutory audit, accounting principles, conventions, and postulates are followed.
13. A management audit may only look at a portion of an organisation, but a statutory audit should look at all of the organization’s financial records.
14. Statutory audits are performed once a year, whereas management audits are performed as needed.
15. The statutory auditor presents his report to the shareholders, and the management auditor presents his report to the management.
16. The management selects the management auditor, and the majority of the shareholders choose the statutory auditor.
17. The management determines the management auditor’s compensation, while the shareholders determine the compensation of the statutory auditor.
18. The statutory auditor shall write and submit the report in accordance with the standard or in the required form; there is no set structure for management auditor reports.
19. Under the Companies Act of 1956, only the statutory auditor is subject to criminal prosecution; the management auditor is not.

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